Weeks before the presentation of the Budget for 2015-16, Union Finance Minister Arun Jaitley and top officials sought Prime Minister Narendra Modi’s views on allowing extra government spending that would have entailed an overshooting of fiscal deficit targets. This came even as the Finance Ministry’s own mid-year economic review tabled in Parliament on December 19, 2014 had made a case for “reviving public investment” and a review of the government’s medium-term fiscal policy to enable such additional expenditures.
“Aap nirnay kijiye (you may take the call)” is what Jaitley supposedly told the Prime Minister, according to an official who was present at that meeting. The response couldn’t have been less ambiguous: Modi was clear he didn’t want any deviation from the path of fiscal consolidation.
The response was on more or less similar lines in the run-up to the 2016-17 and 2017-18 budgets, with the pressure for showing “flexibility” on fiscal targets even more given there was no revival in private investments and the demand destruction that followed demonetisation.
Modi’s nirnay was again the same both times: There shall be no compromise on fiscal prudence, which was highlighted in his government’s very first budget presented on July 10, 2014. Jaitley had, then, stated that “we cannot go on spending today which would be financed by taxation at a future date” while emphasising the importance of “inter-generational equity” and not leaving behind “a legacy of debt for our future generations”.
Last year, the Government blinked on this uncompromising stance, fiscal deficit deepened from the targeted 3.2% to 3.5% of GDP. And the interim Budget put the fiscal deficit target for 2018-19 at 3.4% of GDP, marginally higher than the budgeted 3.3%. The rolling targets of fiscal deficit also saw a revision over the years with the original 3% target set for 2016-17 now being poushed to 2020-21.
During the previous Congress-led UPA regime, the Centre’s gross fiscal deficit – the gap between its total spending and revenue from taxation and other non-debt receipts – shot up more than four-fold in absolute terms, from Rs 126,912 crore to Rs 515,990 crore, and from 2.7% to 5.8% of GDP between 2007-08 and 2011-12.
Only in the UPA’s last two years, were these brought down to Rs 502,858 crore and 4.4% by 2013-14. And even this was mainly due to the threat of foreign investors pulling out money, from an economy experiencing runaway inflation and imbalances both on the fiscal and external payment fronts.
The Modi government’s term, by contrast, has seen fiscal consolidation even without any pressure from the “markets”.
Low global oil prices were deliberately not passed on to consumers. Instead, the excise duties on petrol and diesel were raised to mobilise revenues. These helped reduce the Centre’s fiscal deficit, which was kept well within the Rs 600,000-crore range until 2017-18. In 2016-17, when the deficit was contained at Rs 535,618 crore or 3.5% of GDP, the target of 3% by 2017-18 seemed quite achievable.
However, the twin shocks of demonetisation and GST (goods and services tax) upset all these calculations. In 2017-18, the fiscal deficit was budgeted at 3.2% of GDP, whereas the actual figure turned out to be 3.5%.
For the current fiscal, too, the revised estimate of 3.4% has marginally overshot the budgeted 3.3%. And the Interim budget for 2019-18, presented on Friday, has pegged the deficit again at 3.4%. In absolute terms, the figure is Rs 703,999 crore.
Crossing the Rs 700,000-crore mark is certainly not what Modi, known to be a “deficit hawk” right from his days as Gujarat Chief Minister, would have envisaged. Moreover, it would be difficult for the next government – whether his or any other – to adhere to even the new schedule of achieving the 3% of GDP target by 2020-21 under the Fiscal Responsibility and Budget Management legislation.
The Medium Term Fiscal Policy-cum-Fiscal Policy Strategy Statement, laid in the house on Friday, has attributed the fiscal slippage in the last two years mainly on the lower-than-projected revenues from GST and the government having to provide support to farmers on account of low crop prices.
“Accrual of the full benefit of GST reforms and revenues is expected to take some more time and. the stabilisation phase is expected to continue in 2019-20 too. Further, full fiscal impact of income support scheme for farmers will also be felt in 2019-20,” it has admitted.
On the whole, though, the Modi regime, just like the first NDA government led by Atal Bihari Vajpayee, will be remembered for observing relative fiscal austerity and keeping inflation at low levels.
Commitment to macroeconomic stability did not pay political dividends, though, for the Vajpayee government, as its closing years were also marked by poor farm realisations and weak job markets. Whether that history will be different this time will be known in three months.